I have been a CPA for over 30 years focusing on taxation. I have extensive experience with partnerships, real estate and high net worth individuals.
My ideology can be summarized at least metaphorically by this quote:
"I have a total irreverence for anything connected with society except that which makes the roads safer, the beer stronger, the food cheaper and the old men and old women warmer in the winter and happier in the summer." - Brendan Behan
Nobody I work for has any responsibility for what goes into this blog and you should make no inference that they approve of it or even have read it.

Do We Need A Clergy Tax Simplification Act Of 2014?

Judge Barbara Crabb ruled recently that the exclusion of cash housing allowances from taxable income by members of the clergy (“ministers of the gospel”)is unconstitutional. Among the reactions are cries from the clergy that their lives are not really the tax picnic that you might perceive given the tax free housing allowance that they can use to pay deductible mortgage interest and real estate taxes to help shelter the rest of their income. They are right. The tax treatment of clergy is a confusing result of piecemeal changes made in 1921, 1954, 1967 and 2002 (I probably missed a year). Maybe it is constitutional. Maybe it is not. Regardless, it is something of a mess. We need a Clergy Tax Simplification Act Of 2014 which will pass constitutional muster. To start I will review the current situation. Judge Crabb’s decision addresses just part of it.

The Employee Issue

Ministers, are by statute, considered self-employed for FICA purposes. That means that they pay 15.3%, while secular employees will have 7.65% withheld from their pay, which is matched by the employer. It gets worse. Most ministers will not get the income tax benefit of being self-employed – better deal on out-of-pocket deductions – because they will be considered employees for income tax purposes. Perhaps more significantly, it is such a confusing system, that people probably get it wrong more often than they get it right. The Evangelical Council on Financial Accountability in reacting to Judge Crabb’s ruling quoted from a report that said:

Given the dual tax status of many members of the clergy (e.g., the common circumstance in which a minister is an employee for income tax purposes but subject to the self-employment tax for Social Security purposes), and the fact that the clergy housing exclusion applies to income tax but not to Social Security tax, much confusion exists among members of the clergy regarding the applicability of the exclusion under current tax law. Accordingly, the IRS should improve the tax forms, worksheets, and educational guidance for members of the clergy in connection with the clergy housing exclusion.

When you get people asking the IRS to give them more educational guidance, you know that the system is needlessly complex. If you want to study on it some, here is the IRS audit manual for ministers.

The other peculiar thing that comes out of the dual status situation is that ministers who are required to live in parsonages are taxed on the value of the housing for self-employment tax purposes. That makes them worse off than other employees, such as apartment managers, who are required to live in employer provided housing.

Is It Really That Good A Tax Deal To Be A Minister?

We could construct a lot of examples, but I’m going to stick with back of the envelope type of computations. A moderately compensated senior pastor might be making on the order of $80,000 per year. The FICA penalty is on the whole pay. The income tax savings on the housing allowance is on the part of the pay designated as housing allowance which is actually spent on providing a home. If the pastor is married with a spouse making some income the saving might be mostly at 25%, otherwise it might be mostly at 15%. All in, their special status is not generally putting them very far ahead of similarly compensated professionals.

So if we reformed the system and treated pastors the same way that we treat the executive directors of not-for-profit organizations, the rank and file would probably not be much worse off. Those that are required to live in church housing would come out ahead. It is a different story for those at the top of the ministerial food chain.

It Is A Great Deal For The Favored Few

The housing allowance is a real bonanza for the mega pastors of the mega churches, the folks my blogging buddy Reverend William Thornton refers to as “religious racketeers”. His denomination, the Southern Baptist Conference, has scads of modestly paid pastors (SBC is the second largest denomination in the US in terms of members, but the largest in terms of clergy serving congregations). I would wager that if you put it to a vote, most of them would be happy to give up the income tax exclusion for housing in exchange for simplicity and a FICA match. That might not sit well with the 200+ or so mega pastors of the SBC’s mega churches, who may have disproportionate influence on the denomination’s well-paid leadership, which also likely has handsome housing allowances. When I spoke to Reverend Russell Moore of SBC’s Ethics and Religious Liberty Council, he insisted that the mega pastors are such a tiny minority that they are not worth discussing in this context. He also indicated that it would be wrong for the denomination to even attempt using moral suasion to influence the mega pastors to stop being such chazzers and accept a reasonable dollar cap on the tax-free housing allowance.

Never Mind Constitutional – What Is Right?

Of course, even though most ministers might come out even, the congregations would come out behind. They would be required to match FICA on their minister’s pay, just like every other struggling not for profit has to match FICA on its executive director’s pay.

I am not a great fan of the Freedom From Religion Foundation, since I think they are a bit overzealous in their effort to keep religion out of the public square. The housing allowance controversy is a real gift to them. It will be really hard for denominations to look like they are claiming the moral high ground while they are defending a special tax break that most benefits the richest clergy. Steve Furtick of Elevation Church has as his primary job, as I understand it, encouraging his followers to emulate someone who is reputed to have said:

If thou wilt be perfect, go and sell that thou hast, and give to the poor, and thou shalt have treasure in heaven: and come and follow me.

In order to do this he needs a 16,000 square foot home? And his denomination supports the notion that he should not have to pay income tax on the money his congregation pays him to support that mansion?

When secular people create organization that, inter alia, feed the hungry, give drink to the thirsty, clothe the naked, shelter the homeless, visit the sick and visit the imprisoned they can share the advantage that churches have in receiving tax deductible contribution. Of course the secular organizations have to apply for exempt status and operate in a fiscally transparent mode by filing Form 990, something that churches don’t have to do. The secular organizations hire people who are taxed pretty much the same way that everybody else is and follow pretty much the same requirements that for profit employers have to follow including matching FICA. It is hard to see the public policy rationale for giving better tax treatment to people who help the poor because God tells them to than people who help the poor because they believe it is the right thing to do. I’m sure somebody can explain it.

In defending the special tax status of ministers against constitutional challenge, the primary line of defense has been “standing”. The argument is not so much that it is s constitutional, but that nobody has the right to challenge it in court. That might be a good legal tactic, but it is hardly an inspiring strategy for people claiming the moral high ground. What I would like to see is a proposal to Congress that would phase in a transition of clergy to being taxed like everyone else. Give it a couple of years so small congregations can plan to adapt and grandfather people who are at or near retirement. The way it got the way it is was not from some comprehensive plan, but from piecemeal changes over nearly a century. Let’s have the Clergy Tax Simplification Act of 2014 to clean it up. If a couple of the major denomination got behind it, there would probably be bipartisan support. It would be nice to get those congressmen talking to one another again.

I have not discussed the one time election that clergy can make to avoid self-employment tax based on conscientious objection. I’ll leave that for my commenters.

Once again I have turned my tax blog into “all parsonage, all the time” for a brief period. Always makes me worry when I do that. What has the Tax Court has been up to without me watching? I’ll let you know soon.

On the bright side, since blogging about your own blog represents the height of self-absorption, I vowed to only doing it at century marks. If I am in the middle of something when the bell tolls, I have to wait another 100 posts. Thus I let 400, 500 and 600 go by without remark. And here passes 700 without a review. Unless I pick up the pace, it will be late in tax season, before 800 and I am expecting the toughest tax season in a very long time as I am starting with a very small firm. Much as I look forward to doing some actual work, I still find the prospect daunting and fear the impact it will have on my blog.

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Comments

If Congress and the President were to announce their intentions to simplify all the rules for “ministers”, they would have to consider a year other than 2014; no way they could get their work done in a year.

A good start, however, would be to simply repeal IRC 107 and then they could take all the time they wanted to fiddle with what is left; various accommodations which resulted from numerous previous efforts to appease the religious lobbyists.

I was under the impression that employees living in income tax housing under IRC 119 were still subject to FICA on the value of the lodging.

I think you may have also left out the complexity involved in requiring preachers who exclude housing for income tax purposes to allocate otherwise allowable business expenses. They could deduct the full amount for Social Security tax purposes, but only the portion allocable to the income taxable amount of income for income tax purposes.

I think you may have also missed noting that ministers, like other self-employed folks, get a deduction for half of the Social Security tax they pay; right.

There are now multitudes of reports about the FFRF decision, and there is much misinformation being put out regarding the facts of the matters relevant to the case.

If Congress and the President do act to salvage some semblance of the IRC 107 allowance, I do hope they will be careful to craft their replacement so that the IRS will not be allowed to allow the benefit to “basketball ministers” at places like Pepperdine University.

I’ll check the 119 FICA thing. You are right that I left out the thing about expense allocation. There is a work around of having the church set up an accountable plan. You are right that the SE tax can yield a deduction which mitigates it a little. I also ignored state income taxes. That’s why I gave a link to the audit manual for those who want to go beyond the highlights.

The language in 1408 that says how to compute ministers se income specifically mentions ignoring 107 and 119, which is what made me think they were different.

When that section was added in 1954 se was optional for all ministers. Early on there was an option for farmers to actually goose up their SE income to qualify for social security. That may have been the thinking. There is rev ruling in the late fifties that discusses Congress wanting to put self employed and employed ministers in the same situation. The thinking may have been that the ones that were very low paid would not have been able to build up any social security credit. I need to get at the Congressional record some time to look further into it. According to the social security website SE was not required of ministers until 1967.

The whole self-employed facade was a case of the camel’s nose under the tent. Churches did not want to come under the onerous burden of being employers. What other employers have untrained, volunteer treasurers with term limits? To dodge this bullet they agreed to the fiction that their pastors were self-employed. All they had to do was charge $25 to solemnize their parishioners’ marriages, and boom–they were business professionals, even if 95% of their energies and 95% of their income were church-related. This all became moot in the mid-eighties when it became illegal for churches to pay anyone over $50 a quarter without deducting FICA taxes. Now the church janitor had to enroll in Social Security, even if he only worked 10 hours a week. And unless he mopped floors for at least one other church, it would have been fraudulent for him to claim self-employed status (at least the guy who mowed the church lawn could, if he mowed even one neighbor’s lawn on a regular basis for cash). So, now all that work to keep the church treasurer from joining the ranks of publicans and sinners was for nothing. Church boards, feeling guilty that their janitor only had to pay half the deduction that the pastor did, raised their pastors salaries by 7.65% to compensate. The simplest thing to do at this stage in the game is to stop pretending that a church’s pastor works for himself, rather than for them. Unless he’s the pastor of at least two separate religious corporations, he’s not self-employed.

Judging from the reaction of my SBC clergy colleagues to any mention of losing our housing allowance exclusion, I’d say that most or all would welcome the loss of having to pay SECA on our salary and housing; however, tens of thousands of SBC churches are single staff with volunteer treasurers for whom all this dual status, housing allowance stuff is highly confusing.

I think it far more of an uphill struggle to ‘clarify’ these things if that clarification includes requiring these churches to pay the FICA half for their clergy staff. It just feels like a tax on churches.

Seems to me that a cap on the allowance at the level of income that is taxable for Social Security would be reasonable. Think of this. There may be few ministers paid enough and who live in a house large enough to exclude over the $110k or so taxable, but those who can get free income, no SE taxes or income taxes, on their housing allowance above that figure thereby leaving poorer saps to make up the taxes.

Despite all the rhetoric from the religious lobbyists about how IRC 107 is part of some sort of contrived package deal and that it all balances out, I don’t think so.

Even Peter seems somewhat sympathetic to their claims.

I think IRC 107 stands or falls on its own, independent of what the religious lobbyists have otherwise wrought for their constituency.

It may seem a little complicated, but I would propose it is not near as complicated as some of the stuff Peter writes about.

Here’s how I see some of the history:

The “ministers” wanted Social Security coverage but didn’t want to burden the churches. They got what they wanted.

So, the were allowed to elect in. Then they were in and had to elect out.

That’s easy enough to change, if Congress and the President want to appease them further and use that accounting gimmick that makes it look like the church and minister split the Social Security tax.

Having to make separate computations for income tax purposes and Social Security tax purposes is simply the “expected” consequence of what the religious lobbyists wanted to happen otherwise.

Did I get my history wrong?

Please, don’t make like it has anything to do with the IRC 107 tax free benefit that ONLY ministers get as opposed to all self-employed individuals.

I’m not falling for it.

I also am quite unimpressed with the effort to exploit the public relations effort by appealing to poor preachers and poor churches. Truly poor preachers and poor churches are unlikely, in my opinion, to be adversely affected by Judge Crabb’s ruling, if it holds; and why should poor preachers and poor churches be singled out, UNconstitutionally, for benefits other poor people and poor organizations are denied?

Instead of trying to get people to ignore the million dollar preachers with million dollar IRC 107 benefits, and the lesser hoardes of “basketball ministers”, the religious lobbyists need to try coming up with legitimate alternatives, and I’m not talking about $100,000 caps on IRC 107 benefits, for salvaging some sort of benefit that a few ministers might qualify for as well as an assortment of other do-gooders…like me.

Considering I don’t think the religious lobbyists are up to the task, repeal of IRC 107 would be appropriate and failing that, Judge Crabb’s ruling, as sustained in the 7th Circuit and Supreme Court, would be quite fitting.

Robert, I get that the HA was not created to balance clergy having to pay SECA. I am merely informing you of how most clergy view the NA/SECA business. I think you are underestimating the burden on churches of having to pay and to manage clergy staff as employees for Social Security purposes, but I recognize that all this has nothing to do with Judge Crabb’s ruling. It does impact the discussion of church/clergy taxes and tax breaks if there is to be any new legislation.

You are right that going from zero employees to one is a huge leap in paperwork which would be the case of small churches. Payroll services tend to be pretty inexpensive though. Of course when you have a budget of less than 50k, nothing is inexpensive.